The Cambodian microfinance sector has seen major changes over the past two years.
After being required to declare themselves as private institutions to differentiate from state-owned enterprises, the firms were subject to an 18 percent cap on annual interest rates, effective from April 1 last year. Recently, there has been an increase in illegal lenders offering risky loans to the public.
The Post’s Hor Kimsay talked to Kea Borann, chairman of the Cambodia Microfinance Association (CMA) about the recent changes in the sector.
Since the interest rate cap was implemented in April last year, have you seen any changes among microfinance institutions (MFIs)?
Yes, there have been changes. We found that last year, the number of clients in the MFI industry as a whole declined by nearly 200,000. This is the first time that this has occurred in the sector’s history. This happened after the central bank applied the interest rate cap.
So, where did the clients go? If those clients still take loans and go to private money lenders because they are unable to get one from an official institution, it is worrying. If so, the interest rate cap did not help but brought about a negative impact.
On behalf of CMA, however, we cannot assume anything yet. I cannot say this occurred because of the interest rate cap. There could be other factors. We can only prove this if we conduct a study.
How has net profit changed in the MFI industry after the interest rate cap?
Almost all microfinance operators have seen a decrease in profits and return on equity [ROE]. For instance, AMK Microfinance has seen ROE decline from 20 percent to 13.8 percent.
There is an increasing trend where MFIs sell a majority stake to commercial banks abroad. What are the factors behind that and how will it impact the industry?
I think it is normal. During the 1990s, all lending institutions were set up by NGO funds and operated as NGOs. In the late 2000s, there was commercialisation in the sector as institutions shifted to become private enterprises.
This time, I think it is a new turning point. Many foreign banks are entering and acquiring major MFIs. This could show that, despite Cambodian MFIs struggling with the interest rate cap, foreign investors are still confident in the potential of the sector.
They might have strong capital and a source of funds with low interest, so there is hope that the shift will have a positive impact on the industry.
As the country is preparing for the national elections this month, how will it impact the growth and stability of the microfinance sector?
We have not seen any noticeable change in the industry as the country is preparing for national elections. Deposits are still increasing, while bad loans are stable. The industry is still growing strongly. Cambodians are still using the financial sector as normal.
What are your thoughts on the rising number of unlicensed loan services and how big a threat are they to the financial industry?
It is a very worrying trend because they are not regulated as CMA members are. Illegal institutions don’t offer a transparent service. They don’t follow a code of ethics or conduct themselves professionally.
They don’t even have client protection principals as licensed institutions do. This will cause people to fall seriously in debt from such “predators”.
What advice would you give the public on how to avoid illegal lenders?
Illegal lenders have not penetrated rural areas yet. Their activity is in the city as they use Facebook, SMS messages, and banners to promote their services.
People in urban areas should have access to enough information channels to be able to verify their lender. And clients need to ask for information when they take loans.
They must carefully read and understand the loan contracts. Cambodians should only take out loans from licensed institutions listed with the NBC and CMA, for their own protection.
This interview has been edited for length and clarity.